Insights Volume 4 Number 10 | Table of Contents | Visit for Further Information

r u c h e l m a n AN AMERICAN IN LONDON: DUE DILIGENCE OBSERVATIONS DOUBLE DUTCH: DIVIDEND TAX REFORM EXTENDS EXEMPTION, YET TACKLES ABUSE THE CHANGING FACE OF SERVICE PERMANENT ESTABLISHMENTS SWISS FEDERAL COUNCIL OPENS CONSULTATION PROCESS ON TAX PROPOSAL 17 AND MORE Insights Vol. 4 No. 10 TABLE OF EDITORS’ NOTE CONTENTS In this month’s edition of Insights, our articles address the following: Editors’ Note • An American In London: Due Diligence Observations. Performing due An American in London: Due diligence on private companies for a potential merger or acquisition has been Diligence Observations .............. 5 described as an exercise in educated guessing. The questionable quality of the target’s financial information, potential hidden liabilities, financing, and The Changing Face of Service similar deficiencies may result in a valuation that is neither straightforward Permanent Establishments ...... 12 nor reliable. When the target is abroad, the culture, language, and business norms may cause the educated guess to be more guess and less educated. Double Dutch: Knowing how to overcome this dilemma is a skill set that can be obtained only Dividend Tax Reform Extends through experience. Nick Magone, founder of Magone & Company, P.C., in Exemption, Yet Tackles Abuse . 18 Roseland, New Jersey, shares his experiences in performing due diligence on potential target companies in the U.K. His advice? Numbers are only the The Sharing Economy Part 1: beginning. New Business Models + Traditional Tax Rules Don’t Mix 25 • The Changing Face of Service Permanent Establishments. As governments struggle to adapt the old rules of taxable presence within a jurisdiction Swiss Federal Council Opens to economic activities in the digital age, new concepts have been asserted to Consultation Process on Tax impose tax on foreign service providers who are based abroad but regularly Proposal 17 ............................. 31 furnish services within a country. India is among the global leaders rejecting physical presence in favor of location of the customer. Neha Rastogi and When Does an Aged Account Stanley C. Ruchelman look at the concept of destination based taxation and Receivable Give Rise to a a recent case, where an Indian Income Tax Appellate Tribunal held that the Deemed Repatriation? ............. 36 physical presence of the foreign taxpayer’s employees is not relevant for Art and The Estate: Why Planning determining the existence of a Service P.E. in the source country. is Important, Part I – U.S. • Double Dutch: Dividend Tax Reform Extends Exemption, Yet Tackles Taxpayers ................................ 41 Abuse. This year’s budget in the Netherlands contains a legislative proposal O.E.C.D. Receives Public that introduces a unilateral exemption applicable to corporate shareholders Comments on Proposed Changes based in treaty countries, such as the U.S., subject to stringent anti-abuse to the Model Tax Convention ... 44 rules. In addition, it proposes to bring cooperatives used as holding vehicles within the scope of the dividend withholding tax rules. Soon after the propos- Treasury Turns Back the Clock als were announced, a coalition government was formed and announced a on 2016 Tax Regulations ......... 54 complete elimination of dividend withholding tax. Paul Kraan of Van Campen Liem in Amsterdam explains. updates & Other Tidbits ........... 57 • The Sharing Economy Part 1: New Business Models + Traditional Tax About Us Rules Don’t Mix. The current international tax system was established on principles dating back to the first half of the 19th century, when a nation’s retail economy consisted mostly of brick-and-mortar stores. As the purchase of services and goods was gradually dematerialized and internet giants such as Google or Microsoft appeared, governments struggled adapt tax rules to keep up with new business models. Now, governments around the world have shifted their focus to a relatively new part of the digital economy called the “sharing economy.” Fanny Karaman and Beate Erwin look at recent tax developments in the world of Airbnb and Uber. • Swiss Federal Council Opens Consultation Process on Tax Proposal 17. When Swiss voters rejected the Corporate Tax Reform Act III (“C.T.R. III”) Insights Volume 4 Number 10 | Table of Contents | Visit www.ruchelaw.com for further information. 2 in a referendum on February 12, 2017, Swiss tax reform was not derailed, only delayed. Events that took place in September have moved the process forward. Existing cantonal tax privileges will be abolished, as agreed with the E.U., and replaced by mandatory introduction of a patent box regime in all cantons, voluntary introduction of additional deductions for research and development (“R&D”) expense, and a step-up in basis of hidden reserves created under the old tax regimes or before immigration to Switzerland. Reto Heuberger, Stefan Oesterhelt, and Martin Schenk of Homburger AG, Zurich, explain the most important aspects of these and other aspects of T.P. 17. • When Does an Aged Account Receivable Give Rise to a Deemed Re- patriation? One form of taxation under Subpart F is an “investment in U.S. Property.” The law treats the investment as a form of taxable repatriation of earnings. Under certain circumstances, aged accounts receivable may be seen as a form of taxable investment in U.S. property. Most U.S. tax advisers look to a 60-day rule under which the account receivable is treated as a loan if not settled by the last day of the second month following a sale. However, that is a safe harbor. I.R.S. private letter rulings and Tax Court cases have addressed fact patterns in which the account receivable remains open for a much longer time. Some taxpayers win and others lose. Elizabeth V. Zanet and Stanley C. Ruchelman explain. • Art and the Estate: Why Planning is Important, Part I – U.S. Taxpayers. Taxpayers holding valuable works of art receive different tax treatment, de- pending on the characterization of the individual. Is the individual the art- ist, a dealer, an investor, or a collector? Rusudan Shervashidze and Nina Krauthamer examine various planning tools available, focusing mostly on the collector. • O.E.C.D. Receives Public Comments on Proposed Changes to the Mod- el Tax Convention. In August, the O.E.C.D. released public comments on proposed changes to the Model Tax Convention. Beate Erwin and Stanley C. Ruchelman examines the suggestions received by the O.E.C.D. and pro- vides observations on the interplay between the O.E.C.D. proposed changes and existing U.S. approaches to these issues. Areas covered include whether competent authority agreements can define undefined terms thereby re- moving the interpretation from local courts, whether a limitation on benefits (“L.O.B.”) clause or a principle purpose test (“P.P.T.”) is the better approach to limit treaty shopping, and whether a home that is leased to others can be a permanent home for purposes of applying the residence tiebreaker provision in a treaty. • Treasury Turns Back the Clock on 2016 Tax Regulations. On October 4, the “other shoe dropped” on eight regulations issued by the Obama ad- ministration in 2016 and January 2017. These eight measures, which were first identified in an interim report to the president as unnecessary, unduly complex, excessively burdensome, or failing to provide clarity and useful guidance, will be withdrawn, revoked, or modified. Stanley C. Ruchelman, Sheryl Shah, and Neha Rastogi identify the targets and explain the plans of the Treasury Department. • Updates and Tidbits. This month, Sheryl Shah, Neha Rastogi, and Nina Krauthamer look briefly at certain timely issues: (i) Swiss nexus requirements Insights Volume 4 Number 10 | Table of Contents | Visit www.ruchelaw.com for further information. 3 to be eligible for treaty benefits, (ii) the impact of technology tax reporting and information sharing, (iii) an I.R.S. pilot program expanding the scope of letter rulings to Code §355 stock and security distributions, and (iv) recent application of the 2016 anti-inversion regulations issued by the Obama Ad- ministration under Code §7874. We hope you enjoy this issue. - The Editors Insights Volume 4 Number 10 | Table of Contents | Visit www.ruchelaw.com for further information. 4 AN AMERICAN IN LONDON: DUE DILIGENCE OBSERVATIONS Author INTRODUCTION Nick Magone U.S. business owners and professionals performing due diligence on potential Tags merger or acquisition candidates are all too familiar with the trials and tribulations Due Diligence of arriving at a fair valuation for the acquirer. They often stress over the quality of M&A the target’s financial information, potential hidden liabilities, financing, and the like. United Kingdom Now, imagine that the due diligence exercise is occurring outside of the U.S. be- cause the target is based abroad. Adding to the stress is a different culture as well as different finance and legal terminology, laws, and accounting principles. How is one to manage? The silver lining, in my experience, is that when the due diligence involves a non-list- ed (i.e., privately-held) U.K. company, financial information is much more accessible than it is in the U.S. One can purchase information on a possible target and see the reported operating results, ownership group, and directors. The information is provided in a required government format, as will be discussed. However, this does not guarantee that the information is accurate. Normal due diligence skepticism still applies. This article will provide information on some sources of information, forms of financing, and director responsibilities that are typical in the U.K. This is not a “how to” on M&A due diligence, but rather an overview of the types of financial information, financing, and other business practices relevant to acquiring a privately-held company. It is based on the author’s experience garnered from several due diligence exercises in the U.K.

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